With India’s oil marketing companies recently introducing daily revision in petrol and diesel prices, and with the global crude oil prices simultaneously in a free fall, some might cheer the prospects of a sustained easing of retail fuel prices. Indeed, in the first 13 days that the dynamic pricing has been in practice in India now, retail fuel prices either only fell on most days, or remained unchanged on the other days. There has not been a single increase in petrol and diesel prices so far since July 16, when the daily revision in retail fuel prices began nationwide.

The price of petrol fell by Rs 3.45 per litre in Delhi in 13 days, beginning with the biggest cut of Rs 1.43 per litre (including state taxes and levies) June 16 itself, when petrol price was reduced by after a gap of 15 days, as was the existing practice. Similarly, price of diesel fell by Rs 2.41 per litre in 13 days, including a cut of Rs 1.45 per litre (including state taxes and levies) on June 16 itself. Today (6 am Wednesday-6 am Thursday) petrol is being retailed for Rs 63.46 per litre and diesel for Rs 53.53 per litre in Delhi.

Crude

However, the revision in the price of fuel may not always directly correspond to the change in the global crude oil prices on that day or even the previous day. For example, in percentage terms, while petrol price in Delhi has fallen by over 5% in 13 days and diesel by over 4%, there has been hardly any net change in the price of Indian basket of crude oil, which has fallen by just a minuscule 0.4%. In fact, the price of Indian basket of crude oil for Tuesday, June 27, rose to $45.42 per barrel from $44.28 registered on the previous day, but petrol and diesel price remained unchanged for Wednesday-Thursday.

The reason is that there are several other factors at play which determine the daily retail fuel prices set by oil companies. One of the major factors is the rupee-dollar exchange rate. Indian oil companies import crude oil which is quoted in US dollars, but eventually incur the expense in rupees. Thus, even if the price of the crude oil is on the fall but the rupee is also weakening against the dollar at the same time, it may offset the potential gains to oil refiners. On the other hand, strengthening rupee along with weakening crude oil further augments oil refining and marketing companies’ gains. Data shows that for the Tuesday as well, the appreciation in rupee offset the rise in crude oil prices for Indian oil companies by about 11 basis points.

Inventory

Among other factors for setting retail fuel prices is the demand-supply situation. Keeping other things such as crude oil prices and rupee-dollar exchange rate, short supply or low output of fuel often leads to a rise in its price, while conversely, an increase in the supply mostly results in the decrease in the price. It must also be noted that oil refining and marketing companies maintain crude oil inventory of as much as up to six weeks, which also influences to some extent the price of the products being made from it.

Logistics

Further, logistics is also one of the other major factors in pricing of retail fuel. Petrol and diesel transported to over longer distances to cities or regions farther from depots would typically be priced higher than at the places nearer to the oil companies’ storage areas. In fact, as has been seen, petrol and diesel prices often vary from town-to-town or even between dealers in the neighboring regions, though, mostly by just a few paise. This difference may be huge between cities far from each other. For example, petrol price in Mumbai for today is at Rs 74.71 per litre. And finally, of course, state taxes and levies play an important role in the retail fuel prices in that state.

The three state-run oil marketing companies Indian Oil Corp, Bharat Petroleum Corp and Hindustan Petroleum Corp began daily revision of retail prices of petrol and diesel all across the country with effect from June 16, in a move that would ensure that the benefit of even the smallest of changes in the international oil prices is passed on to dealers and consumers. This is a leap further towards true deregulation, since the new practice would ensure that no party — including the oil marketing companies — loses out for an entire fortnight in the event of a sharp fluctuation in crude oil prices. With daily revision, chances of major changes in the prices are very low, and the rise or cut would mostly be in few paise, of course depending on the movement in the crude oil prices and other factors as discussed above.